Chapter 02 - Review of the Accounting Process
EXERCISES Assets = Liabilities + Paid-in Capital + Retained Earnings
1. + 300,000 (cash) + 300,000 (common stock)2. - 10,000 (cash)
+ 40,000 (equipment) + 30,000 (note payable)3. + 90,000 (inventory) + 90,000 (accounts payable)4. + 120,000 (accounts receivable) + 120,000 (revenue)
- 70,000 (inventory) - 70,000 (expense)5. - 5,000 (cash) - 5,000 (expense)6. - 6,000 (cash)
+ 6,000 (prepaid insurance)7. - 70,000 (cash) - 70,000 (accounts payable)8. + 55,000 (cash)
- 55,000 (accounts receivable)9. - 1,000 (accumulated depreciation) - 1,000 (expense)
2-1
Chapter 2 Review of the Accounting Process
Exercise 2-1
Chapter 02 - Review of the Accounting Process
Exercise 2-21. Cash........................................................................ 300,000
Common stock.................................................... 300,0002. Equipment............................................................... 40,000
Note payable....................................................... 30,000Cash ................................................................... 10,000
3. Inventory................................................................. 90,000Accounts payable................................................ 90,000
4. Accounts receivable................................................ 120,000Sales revenue...................................................... 120,000
Cost of goods sold.................................................. 70,000Inventory............................................................. 70,000
5. Rent expense........................................................... 5,000Cash.................................................................... 5,000
6. Prepaid insurance.................................................... 6,000Cash.................................................................... 6,000
7. Accounts payable.................................................... 70,000Cash.................................................................... 70,000
8. Cash........................................................................ 55,000Accounts receivable............................................ 55,000
9. Depreciation expense.............................................. 1,000Accumulated depreciation................................... 1,000
1. Cash.................................................................... 500,000Common stock.................................................. 500,000
2. Furniture and fixtures.......................................... 100,000Cash................................................................. 40,000Note payable .................................................... 60,000
3. Inventory............................................................. 200,000Accounts payable............................................. 200,000
4. Accounts receivable............................................ 280,000Sales revenue.................................................... 280,000
Cost of goods sold............................................... 140,000Inventory.......................................................... 140,000
5. Rent expense....................................................... 6,000Cash................................................................. 6,000
2-2
Exercise 2-4
Chapter 02 - Review of the Accounting Process
6. Prepaid insurance................................................ 3,000Cash................................................................. 3,000
7. Accounts payable................................................ 120,000Cash................................................................. 120,000
8. Cash.................................................................... 55,000Accounts receivable.......................................... 55,000
9. Retained earnings................................................ 5,000Cash................................................................. 5,000
10. Depreciation expense.......................................... 2,000Accumulated depreciation................................ 2,000
11. Insurance expense ($3,000 ÷ 12 months)................. 250Prepaid insurance............................................. 250
1................Prepaid insurance ($12,000 x 30/36) 10,000
Insurance expense................................................ 10,0002. Depreciation expense............................................... 15,000
Accumulated depreciation ................................... 15,0003. Bad debt expense ($6,500 - 2,000)............................... 4,500
Allowance for uncollectible accounts................... 4,5004. Salaries expense....................................................... 18,000
Salaries payable.................................................... 18,0005. Interest expense ($200,000 x 12% x 2/12)...................... 4,000
Interest payable.................................................... 4,0006. Unearned rent revenue.............................................. 1,500
Rent revenue (1/2 x $3,000)..................................... 1,500
2-3
Exercise 2-8
Chapter 02 - Review of the Accounting Process
Exercise 2-91. Interest receivable ($90,000 x 8% x 3/12)...................... 1,800
Interest revenue.................................................... 1,8002. Rent expense ($6,000 x 2/3)......................................... 4,000
Prepaid rent.......................................................... 4,0003. Rent revenue ($12,000 x 7/12)...................................... 7,000
Unearned rent revenue ......................................... 7,0004. Depreciation expense............................................... 4,500
Accumulated depreciation.................................... 4,5005. Salaries expense ...................................................... 8,000
Salaries payable.................................................... 8,0006. Supplies expense ($2,000 + 6,500 - 3,250).................... 5,250
Supplies................................................................ 5,250
December 31, 2011Sales revenue................................................................ 750,000Interest revenue............................................................. 3,000
Income summary....................................................... 753,000
Income summary........................................................... 576,000Cost of goods sold..................................................... 420,000Salaries expense........................................................ 100,000Rent expense............................................................. 15,000Depreciation expense................................................ 30,000Interest expense......................................................... 5,000Insurance expense..................................................... 6,000
Income summary ($753,000 - 576,000).............................. 177,000Retained earnings ..................................................... 177,000
Requirement 1
Supplies 11/30 Balance 1,500
Expense 2,000
2-4
Exercise 2-12
Exercise 2-14
Chapter 02 - Review of the Accounting Process
Purchased ?
12/31 Balance 3,000
Cost of supplies purchased = $3,000 + 2,000 - 1,500 = $3,500
2-5
Chapter 02 - Review of the Accounting Process
Exercise 2-14 (continued)
Requirement 2 Prepaid insurance
11/30 Balance 6,000Expense ?
12/31 Balance 4,500
Insurance expense for December = $6,000 - 4,500 = $1,500
December 31, 2011Insurance expense......................................................... 1,500
Prepaid insurance...................................................... 1,500
Requirement 3
Wages payable 10,000 11/30 Balance
Wages paid 10,000 ? Accrued wages
15,000 12/31 Balance
Accrued wages for December = $15,000
December 31, 2011Wages expense.............................................................. 15,000
Wages payable.......................................................... 15,000
2-6
Chapter 02 - Review of the Accounting Process
Exercise 2-14 (concluded)
Requirement 4 Unearned rent revenue
2,000 11/30 BalanceEarned for Dec. 1,000
1,000 12/31 Balance
Rent revenue recognized each month = $3,000 x 1/3 = $1,000
December 31, 2011Unearned rent revenue................................................... 1,000
Rent revenue............................................................. 1,000
2-7
Chapter 02 - Review of the Accounting Process
Exercise 2-16Unadjusted net income $30,000
Adjustments:a. Only $2,000 in insurance should be expensed + 4,000b. Sales revenue overstated - 1,000c. Supplies expense overstated + 750d. Interest expense understated ($20,000 x 12% x 3/12) - 600Adjusted net income $33,150
2-8
Chapter 02 - Review of the Accounting Process
Stanley and Jones Lawn Service CompanyIncome Statement
For the Year Ended December 31, 2011
Sales revenue (1).......................................... $315,000
Operating expenses:Salaries .................................................... $180,000Supplies (2)............................................... 24,500Rent ......................................................... 12,000Insurance (3) ............................................. 4,000Miscellaneous (4) ..................................... 21,000Depreciation ............................................. 10,000
Total operating expenses ............. 251,500Operating income ....................................... 63,500Other expense:
Interest (5)................................................. 1,500Net income ................................................. $62,000
(1) $320,000 cash collected less $5,000 decrease in accounts receivable.
Cash ...................................................................... 320,000Accounts receivable (decrease in account).......... 5,000Sales revenue (to balance)................................... 315,000
(2) $25,000 cash paid for the purchase of supplies less $500 increase in supplies.
Supplies expense (to balance) ................................ 24,500Supplies (increase in account)................................. 500
Cash ................................................................... 25,000
2-9
Exercise 2-17
Chapter 02 - Review of the Accounting Process
Exercise 2-17 (concluded)
(3) $6,000 cash paid for insurance less $2,000 ending balance in prepaid insurance.
Insurance expense (to balance) ............................... 4,000Prepaid insurance (increase in account)................... 2,000
Cash ................................................................... 6,000
(4) $20,000 cash paid for miscellaneous expenses plus increase in accrued liabilities.
Miscellaneous expense (to balance) ....................... 21,000Accrued liabilities (increase in account).............. 1,000Cash ................................................................... 20,000
(5) $100,000 x 6% x 3/12 = $1,500
Interest expense .................................................... 1,500Interest payable................................................... 1,500
2-10
Chapter 02 - Review of the Accounting Process
1. d. The
event is recorded as an increase to accounts receivable and an increase in revenue. An increase to accounts receivable represents an increase in assets and the increase in revenue will increase net income which will in turn increase retained earnings.
2. b. The amount accrued as commissions for each salesperson will be any commissions due over and above the fixed salary as follows:
The amount accrued is $28,000.
3. b. A net decrease in accounts receivable means that cash collections exceeded accrual revenue. Therefore, cash basis income would be higher when compared to accrual basis. A net decrease in accrued liabilities indicates that cash payments for expenses are greater than accrual expenses. Therefore, cash basis income would be lower than accrual basis income.
4. a. Cash basis income: Cash collected in May $3,200,000
Accrual basis income:
Revenue recognized in April $3,200,000 Less: Expenses recognized in April (1,500,000) Income $1,700,000
5. d. Expense recognized $437,500 Add: Increase in prepaid insurance 17,500 Cash paid for insurance $455,000
2-11
CPA REVIEW QUESTIONS
Chapter 02 - Review of the Accounting Process
Requirement 2
2011 Debit CreditJan. 1 Cash .................................................... 3,500
Sales revenue .................................. 3,500
Jan. 1 Cost of goods sold ............................... 2,000 Inventory ......................................... 2,000
Jan. 2 Equipment ........................................... 5,500 Accounts payable ............................ 5,500
Jan. 4 Advertising expense ............................ 150 Accounts payable ............................ 150
Jan. 8 Accounts receivable ............................ 5,000 Sales revenue .................................. 5,000
Jan. 8 Cost of goods sold ............................... 2,800 Inventory ......................................... 2,800
Jan. 10 Inventory ............................................. 9,500 Accounts payable ............................ 9,500
Jan. 13 Equipment ........................................... 800 Cash ................................................ 800
Jan. 16 Accounts payable ................................ 5,500 Cash ................................................ 5,500
Jan. 18 Cash .................................................... 4,000 Accounts receivable ........................ 4,000
Jan. 20 Rent expense ....................................... 800 Cash ................................................. 800
Jan. 30 Wage expense ..................................... 3,000 Cash ................................................ 3,000
Jan. 31 Retained earnings ................................ 1,000 Cash ................................................ 1,000
2-12
PROBLEMS
Problem 2-2
Chapter 02 - Review of the Accounting Process
Problem 2-2 (continued)Requirements 1 and 3 BALANCE SHEET ACCOUNTS
Cash Accounts receivable_____________________________ _____________________________
1/1 Bal. 5,000 1/1 Bal. 2,000
1/1 3,500 800 1/13 1/8 5,000 4,000 1/18
1/18 4,000 5,500 1/16
800 1/20
3,000 1/30
1,000 1/31________________ ________________
1/31 Bal. 1,400 1/31 Bal. 3,000
Inventory Equipment_____________________________ _____________________________
1/1 Bal. 5,000 1/1 Bal. 11,000
1/10 9,500 2,000 1/1 1/2 5,500
2,800 1/8 1/13 800________________ ________________
1/31 Bal. 9,700 1/31 Bal. 17,300
Accumulated depreciation Accounts payable_____________________________ _____________________________
3,500 1/1 Bal. 3,000 1/1 Bal.
1/16 5,500 5,500 1/2
150 1/4
9,500 1/10________________ ________________
3,500 1/31 Bal. 12,650 1/31 Bal.
Common stock Retained earnings_____________________________ _____________________________
10,000 1/1 Bal. 6,500 1/1 Bal.
1/31 1,000
________________ ________________
10,000 1/31 Bal. 5,500 1/31 Bal.
2-13
Chapter 02 - Review of the Accounting Process
2-14
Chapter 02 - Review of the Accounting Process
Problem 2-2 (continued)
INCOME STATEMENT ACCOUNTS
Sales revenue Cost of goods sold_____________________________ _____________________________
0 1/1 Bal. 1/1 Bal. 0
3,500 1/1 1/1 2,000
5,000 1/8 1/8 2,800________________ ________________
8,500 1/31 Bal. 1/31 Bal. 4,800
Rent expense Wage expense_____________________________ _____________________________
1/1 Bal. 0 1/1 Bal. 0
1/20 800 1/30 3,000________________ ________________
1/31 Bal. 800 1/31 Bal. 3,000
Advertising expense_____________________________
1/1 Bal. 0
1/4 150________________
1/31 Bal. 150
2-15
Chapter 02 - Review of the Accounting Process
Problem 2-2 (concluded)
Requirement 4
Account Title Debits CreditsCash 1,400Accounts receivable 3,000Inventory 9,700Equipment 17,300Accumulated depreciation 3,500Accounts payable 12,650Common stock 10,000Retained earnings 5,500Sales revenue 8,500Cost of goods sold 4,800Wage expense 3,000Rent expense 800Advertising expense 150 ______
Totals 40,150 40,150
1.........................Depreciation expense 10,000
Accumulated depreciation.................................... 10,0002. Bad debt expense ($5,500 - 3,000)............................... 2,500
Allowance for uncollectible accounts................... 2,5003. Wage expense.......................................................... 1,500
Wages payable..................................................... 1,5004. Interest expense ($50,000 x 12% x 3/12)....................... 1,500
Interest payable.................................................... 1,5005. Interest receivable ($20,000 x 8% x 10/12)................... 1,333
Interest revenue.................................................... 1,3336. Prepaid insurance ($6,000 x 15/24).............................. 3,750
Insurance expense................................................ 3,7507. Supplies expense ($1,500 - 800).................................. 700
Supplies................................................................ 7008. Sales revenue........................................................... 2,000
Unearned revenue................................................. 2,000
2-16
Problem 2-3
Chapter 02 - Review of the Accounting Process
9. Rent expense............................................................ 1,000Prepaid rent ......................................................... 1,000
2-17
Chapter 02 - Review of the Accounting Process
Problem 2-7
Requirement 1a. Interest receivable ................................................... 600
Interest revenue ($10,000 x 12% x 1/2)..................... 600b. Depreciation expense ($30,000 x 1/5).......................... 6,000
Accumulated depreciation.................................... 6,000c. Unearned rent revenue.............................................. 2,000
Rent revenue ($6,000 x 2/6).................................... 2,000d. Prepaid insurance .................................................... 1,500
Insurance expense ($2,400 x 15/24)......................... 1,500e. Interest expense ($20,000 x 12% x 3/12)....................... 600
Interest payable.................................................... 600f. Supplies expense ($1,800 - 700).................................. 1,100
Supplies................................................................ 1,100
Requirement 2Income overstated
(understated)Adjustments to revenues:
Understatement of interest revenue $ (600)Understatement of rent revenue (2,000)
Adjustments to expenses:
Overstatement of insurance expense (1,500)Understatement of depreciation expense 6,000Understatement of interest expense 600Understatement of supplies expense 1,100 Overstatement of net income $3,600
2-18
Chapter 02 - Review of the Accounting Process
Problem 2-9
Requirements 1 and 2a. Depreciation expense ($50,000 ÷ 50 years)................... 1,000
Accumulated depreciation - buildings................... 1,000b. Depreciation expense ($100,000 x 10%)...................... 10,000
Accumulated depreciation - equipment................. 10,000c. Insurance expense.................................................... 1,500
Prepaid insurance ................................................ 1,500d. Bad debt expense .................................................... 850
Allowance for uncollectible accounts................... 850 [($9,000 x 10%) - $50]
e. Salaries expense....................................................... 1,500Salaries payable.................................................... 1,500
f. Rent revenue............................................................ 1,200Unearned rent revenue.......................................... 1,200
2-19
Chapter 02 - Review of the Accounting Process
Problem 2-9 (continued)BALANCE SHEET ACCOUNTS
Cash Accounts receivable_____________________________ _____________________________
Bal. 8,000 Bal. 9,000________________ ________________
12/31 Bal. 8,000 12/31 Bal. 9,000
Prepaid insurance Allow. for uncollectible accounts_____________________________ _____________________________
Bal. 3,000 50 Bal.
1,500 Adjusting 850 Adjusting________________ ________________
12/31 Bal. 1,500 900 12/31 Bal.
Land Buildings_____________________________ _____________________________
Bal. 200,000 Bal. 50,000________________ ________________
12/31 Bal. 200,000 12/31 Bal. 50,000
Equipment Accumulated depreciation-bldg._____________________________ _____________________________
Bal. 100,000 20,000 Bal.
1,000 Adjusting________________ ________________
12/31 Bal. 100,000 21,000 12/31 Bal.
Accumulated depreciation-equip. Accounts payable_____________________________ _____________________________
40,000 Bal. 35,000 Bal.
10,000 Adjusting________________ ________________
50,000 12/31 Bal. 35,000 12/31 Bal.
2-20
Chapter 02 - Review of the Accounting Process
Problem 2-9 (continued)
Salaries payable Unearned rent revenue_____________________________ _____________________________
0 Bal. 0 Bal.
1,500 Adjusting 1,200 Adjusting________________ ________________
1,500 12/31 Bal. 1,200 12/31 Bal.
Common stock Retained earnings_____________________________ _____________________________
200,000 Bal. 56,450 Bal.________________ ________________
200,000 12/31 Bal. 56,450 12/31 Bal.
INCOME STATEMENT ACCOUNTS
Sales revenue Interest revenue_____________________________ _____________________________
90,000 Bal. 3,000 Bal.________________ ________________
90,000 12/31 Bal. 3,000 12/31 Bal.
Rent revenue Salaries expense_____________________________ _____________________________
7,500 Bal. Bal. 37,000
Adjusting 1,200 Adjusting 1,500________________ ________________
6,300 12/31 Bal. 12/31 Bal. 38,500
Bad debt expense Depreciation expense_____________________________ _____________________________
Bal. 0 Bal. 0
Adjusting 850 Adjusting 1,000
Adjusting 10,000________________ ________________
12/31 Bal. 850 12/31 Bal. 11,000
2-21
Chapter 02 - Review of the Accounting Process
Problem 2-9 (continued)
Insurance expense Utility expense_____________________________ _____________________________
Bal. 0 Bal. 30,000
Adjusting 1,500________________ ________________
12/31 Bal. 1,500 12/31 Bal. 30,000
Maintenance expense_____________________________
Bal. 15,000________________
12/31 Bal. 15,000
2-22
Chapter 02 - Review of the Accounting Process
Problem 2-9 (continued)
Requirement 3
2-23
Account Title Debits CreditsCash 8,000Accounts receivable 9,000Allowance for uncollectible accounts 900Prepaid insurance 1,500Land 200,000Buildings 50,000Accumulated depreciation-buildings 21,000Equipment 100,000Accumulated depreciation-equipment 50,000Accounts payable 35,000Salaries payable 1,500Unearned rent revenue 1,200Common stock 200,000Retained earnings 56,450Sales revenue 90,000Interest revenue 3,000Rent revenue 6,300Salaries expense 38,500Bad debt expense 850Depreciation expense 11,000Insurance expense 1,500Utility expense 30,000Maintenance expense 15,000 ______
Totals 465,350 465,350
Chapter 02 - Review of the Accounting Process
Problem 2-9 (continued)
Requirement 4
December 31, 2011Sales revenue................................................................ 90,000Interest revenue ............................................................ 3,000Rent revenue ................................................................ 6,300
Income summary....................................................... 99,300
Income summary........................................................... 96,850Salaries expense........................................................ 38,500Bad debt expense....................................................... 850Depreciation expense................................................ 11,000Insurance expense .................................................... 1,500Utility expense ......................................................... 30,000Maintenance expense ............................................... 15,000
Income summary ($99,300 - 96,850)................................. 2,450Retained earnings...................................................... 2,450
2-24
Chapter 02 - Review of the Accounting Process
Problem 2-9 (concluded)
Requirement 5
2-25
Account Title Debits CreditsCash 8,000Accounts receivable 9,000Allowance for uncollectible accounts 900Prepaid insurance 1,500Land 200,000Buildings 50,000Accumulated depreciation-buildings 21,000Equipment 100,000Accumulated depreciation-equipment 50,000Accounts payable 35,000Salaries payable 1,500Unearned rent revenue 1,200Common stock 200,000Retained earnings ______ 58,900
Totals 368,500 368,500
Chapter 02 - Review of the Accounting Process
Problem 2-10Computations:
Sales revenueSales revenue during 2011 = $320,000 + 22,000 = $342,000
Cost of goods sold
Accounts payable 0 1/1 Balance
Cash paid 220,000 ? Purchases
30,000 12/31 Balance
Purchases during 2011 = $220,000 + 30,000 = $250,000
Inventory 1/1 Balance 0Purchases 250,000
? Cost of goods sold
12/31 Balance 50,000
Cost of goods sold during 2011 = $250,000 - 50,000 = $200,000
Rent expense and prepaid rentPrepaid rent = $ 3,000 x 2/3 = $2,000Rent expense during 2011 = $14,000 - 2,000 = $12,000
Depreciation expenseDepreciation during 2011 = $30,000 x 10% = $3,000
Interest expenseInterest accrued during 2011 = $40,000 x 12% x 9/12 = $3,600
Salaries expenseCash paid plus accrued salaries = $80,000 + 5,000 = $85,000
2-26
Chapter 02 - Review of the Accounting Process
Problem 2-10 (continued)
McGUIRE CORPORATIONIncome Statement
For the Year Ended December 31, 2011
Sales revenue .................................................. $342,000Cost of goods sold .......................................... 200,000Gross profit .................................................... 142,000
Operating expenses:Salaries......................................................... 85,000Rent.............................................................. 12,000Depreciation.................................................. 3,000Bad debt........................................................ 3,000Miscellaneous .............................................. 10,000
Total operating expenses ............... 113,000Operating income ........................................... 29,000Other expense: Interest ........................................................ 3,600Net income ..................................................... $ 25,400
2-27
Chapter 02 - Review of the Accounting Process
Problem 2-10 (concluded)
McGUIRE CORPORATIONBalance Sheet
At December 31, 2011
Assets
Current assets:Cash .......................................................... $ 56,000 (1)
Accounts receivable .................................. $22,000Less: Allowance for uncollectible accounts (3,000 ) 19,000Prepaid rent ............................................... 2,000Inventory ................................................... 50,000
Total current assets ................................. 127,000
Equipment .................................................... 30,000Less: Accumulated depreciation ................ (3,000 ) 27,000
Total assets ........................................... $154,000
Liabilities and Shareholders' Equity
Current liabilities:Accounts payable ...................................... $ 30,000Salaries payable ......................................... 5,000Note payable .............................................Interest payable .........................................
40,000 3,600
Total current liabilities ............................ 78,600
Shareholders’ equity:Common stock .......................................... $50,000Retained earnings ...................................... 25,400
Total shareholders’ equity ....................... 75,400Total liabilities and shareholders’ equity $154,000
(1) $410,000 - 354,000 = $56,000
2-28
Chapter 02 - Review of the Accounting Process
Problem 2-12
Requirement 1
Computations:
Sales revenue:Cash collected from customers $675,000Add: Increase in accounts receivable 30,000 Sales revenue $705,000
Interest revenue:Cash received $4,000Add: Amount accrued at the end of 2011 ($50,000 x .08 x 9/12) 3,000 (c)Deduct: Amount accrued at the end of 2010 (3,000) Interest revenue $4,000
Cost of goods sold:Cash paid for merchandise $390,000Add: Increase in accounts payable 12,000 Purchases during 2011 402,000Add: Decrease in inventory 18,000 Cost of goods sold $420,000
Insurance expense:Cash paid $6,000Add: Prepaid insurance expired during 2011 2,500Deduct: Prepaid insurance on 12/31/11 ($6,000 x 4/12) (2,000) (a) Insurance expense $6,500
Salaries expense:Cash paid $210,000Add: Increase in salaries payable 4,000 Salaries expense $214,000
2-29
Chapter 02 - Review of the Accounting Process
Problem 2-12 (continued)
Interest expense:Amount accrued at the end of 2011($100,000 x .06 x 2/12) $1,000 (d)
Rent expense:Amount paid $24,000Add: Prepaid rent on 12/31/10 expired during 2011 11,000Deduct: Prepaid rent on 12/31/11 ($24,000 x 6/12) (12,000) (b) Rent expense $23,000
Depreciation expense: Increase in accumulated depreciation $10,000
Zambrano Wholesale CorporationIncome statement
For the Year Ended December 31, 2011
Sales revenue $705,000 Cost of goods sold 420,000Gross profit 285,000Operating expenses: Insurance $ 6,500 Salaries 214,000 Rent 23,000 Depreciation 10,000 Total operating expenses 253,500Operating income 31,500Other income (expense): Interest revenue 4,000 Interest expense (1,000) 3,000Net income $34,500
2-30
Chapter 02 - Review of the Accounting Process
Problem 2-12 (concluded)
Requirement 2
a. Prepaid insurance $ 2,000 b. Prepaid rent 12,000 c. Interest receivable 3,000 d. Interest payable 1,000
2-31
Chapter 02 - Review of the Accounting Process
2-32